10-year TIPS auction Monday, Jan 11

Thursday, January 7th, 2010
Categorized as: Yesterday's News (old post archive)

The Treasury announced today it will offer $10 billion in 10-year TIPS at auction on Monday, January 11. Like Series I Savings Bonds, TIPS are a Treasury-issued inflation-protected security. Among their many differences, TIPS typically have a higher base interest rate than I bonds. Experienced I bond investors may be interested in this auction.

To purchase TIPS at the auction, log on to your TreasuryDirect account and place an order before the day of the auction. TIPS are available in $100 increments.

As a TreasuryDirect investor, you won’t actually place an auction bid. Large financial institutions do that outside of TreasuryDirect. However, you will receive the amount of TIPS you order at the highest interest rate determined in the auction. The actual price, yield, and rate of the investment won’t be known until after the auction.

As of yesterday, the Treasury calculated the 10-year yield of outstanding TIPS at 1.48%. Daily Treasury Real Yield Curve Rates is a web page the Treasury updates daily with current calculated yields for specific TIPS terms.

This compares to the current I bond fixed rate of 0.3%. However, note that there are other differences between TIPS and I bonds other than the rate.

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FDIC Insured Certificates of Deposit can pay 1 or 2% more than savings bonds when held for a similar length of time. See top CD Rates Below:


On January 8th, 2010 Rick said:

Tom: It may be true that TIPS currently have a notably higher base rate than the Series I Bonds. However, there are other factors that should be considered before giving TIPS an all thumbs up. Most holders of TIPS tend to hang on to these marketable securities for the duration which means a minimum of 5 years for the 5 year TIPS. In contrast, there is only a 1 year holding period for the Series I Bonds. So for all “practical purposes”, the Series I Bonds are arguably more liquid than TIPS. Furthermore, it doesn’t take an Einstein to figure out that personal income taxes are going to shoot through the roof soon thus making TIPS somewhat less attractive than Series I Bonds since the earned income from TIPS are taxable on a yearly basis. Series I Bonds on the other hand are literally a tax haven since taxes on the accumulated interest aren’t due until the Bonds are redeemed. At that point of time, Federal taxes could be far more favorable to the Series I bondholder than to the one currently holding TIPS.

On January 8th, 2010 Tom Adams said:

Rick – you’re spot on about taxes, but not liquidity. TreasuryDirect will sell your TIPS for you whenever you like. There’s a transaction fee and you can get back less than you put it if interest rates go up (unlike with I bonds), but the only liquidity difference is that you can’t cash the I bond during the first year while the TIPS can be turned to cash anytime.

Tom Adams

On January 12th, 2010 Mike B. said:

I just read that the Treasury will auction 30-yr TIPS in February. Any guess as to what the yield might be? The longest duration TIPS out there is the 30-yr sold in 2002, which has 22 yrs 3 mos left and is yielding 2%, about the same as the most recent 20-yr (19 yrs left). I might buy the new one if I thought it would yield significantly more than 2%, but from the similarity of the 20- and 30-yr yields now, I’m not sure it will. Is there any information bearing on this other than the yields just before the auction?

On January 12th, 2010 Tom Adams said:

Mike – when the issue is officially announced, the bond will have a “coupon” rate, which is the rate it will pay based on a $1,000 investment. The auction price will determine the actual investment price, which is typically a little below to a little above $1,000. But you’ll earn the coupon rate on $1,000 whether you pay more or less than $1,000. It appears I neglected to include the coupon rate in the announcement above.

But more importantly, make sure you understand the impact higher interest rates will have on the redemption value of this bond. Personally, I’d stay away from it. Rates aren’t going to stay this low for 30 years. When they rise, the redemption value will go down. It you can hold on for 30 years this isn’t such a big deal, maybe, but it’s a deal-breaker for me.

Tom Adams

On January 12th, 2010 Mike B. said:

Thanks, Tom. However, I think the coupon rate is set at auction (unless it is a re-opening). So I don’t think we’ll know that in advance – in any case, I think the yield is the important thing.

I know that the value of bonds moves opposite to interest rates – however, it wasn’t obvious to me that long-term TIPS rates are low, since they haven’t been around that long and the initial high rates (late 90s) might have been due to their novelty.

On January 13th, 2010 Tom Adams said:

Mike – I double-checked the press release for this auction and you are correct, it says both the real yield and the interest rate will be determined at the auction. It’s only on a reopening that you know the interest rate of the bond in advance, but in that case the yield can be very different from the rate. Here’s an example.

The point you make about the uncertainty of TIPS interest rates is a good one, although S & P says it’s associated with a country’s credit rating.

Tom Adams

On March 3rd, 2010 Mo said:

Is this correct concept in the following simplified example?

Assuming a 2% inflation each year & the yield at purchase is 1.46%: My one dollar after 10 year TIPS will be 1x(1.0146)x(1.0146+0.02)x(1.0146+0.02×0.02)x(1.0146+0.02+0.02+0.02)x(1.0146+0.08)x(1.146+0.1)x ( 1.0146+0.12)x(1.0146+0.14)x(1.0146+0.16)x(1.0146+0.16) =1.1475 or a 14.7% total return.

On March 3rd, 2010 Mo said:

Anyone has a live example of a 10 year TIPS purchased a few year back and what ends up to be the approx inflation adjusted rate per year.

On March 3rd, 2010 Tom Adams said:

Mo – your math looks wrong to me. The formula would be, where:

V = Current Value

A = Amount Invested

n = number of years

V = A * (1 + .0146 + .02) ^ n

However, the inflation rate is actually adjusted monthly with TIPS, and I don’t believe using an average inflation rate like this is going to be very accurate.

Tom Adams

On March 8th, 2010 Mike B. said:

Tom – just to amplify on your response.

Let’s assume 1% inflation every 6 months (essentially the same as 2%/year). The principal at maturity is A*(1.01)^20=1.22A. In addition to this, every 6 months the owner gets interest payments, totaling (0.0146/2)*A*Sum(1.01)^n, where the sum is from n=1 to 20. This interest term is 0.162A, for a total return of 1.38A. Your equation gives a little more, because it assumes reinvestment of the interest payments using the same rates (which you can’t easily do).

I don’t think using the average inflation rate in this example causes much error. If all the inflation occurred in the first 6 months and none thereafter, the total return would be 1.40A using the above method. If the inflation instead all occurred during the last 6 months, it would be 1.37A, I think.

On March 8th, 2010 Tom Adams said:

Mike – you are correct that the formula I gave above assumes the inflation/interest payments are reinvested, which is true for Savings Bonds but not, as you point out, for TIPS.

Every month the Treasury publishes indexes for calculating the current value of every TIPS ever issued. I think perhaps this is what you’re looking for in terms of exact values of TIPS including the inflation component. See, for example, this month’s indexes.

Tom Adams

Comments Closed

June 1, 2010

After six years, over 400 posts, 3,680 real comments, and over 90,000 spam comments (thank you, Akismet, for making managing a blog with comments possible), I am closing public comments on Savings-Bond-Advisor.com. I will contine to update the main articles on this site, but not the comments.

Virtually every question about Savings Bonds has been asked and answered on this site multiple times. Use the search feature (see the box in the gray area near the top of this page) or the detailed menu on the lower part of the home page to find the information you're looking for. If you have a copy of Savings Bond Advisor, you can ask me a question here.

Tom Adams

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